Manchester Capitalism: A View From The North

Tuesday, 29 July 2014

“There is nothing more
difficult to take in hand, more perilous to conduct, or more uncertain in its
success, than to take the lead in the introduction of a new order of things.
For the reformer has enemies in all those who profit by the old order, and only
lukewarm defenders in all those who would profit by the new order, this
lukewarmness arising partly from fear of their adversaries … and partly from
the incredulity of mankind, who do not truly believe in anything new until they
have had actual experience of it.” ( Machiavelli, The Prince, 1532, Chapter 6)

“For the overriding
economic problem discussed in this book, the first necessity is not technical
devices but the public acceptance necessary to make them work” (Hirsch, Social
Limits to Growth, 1977, conclusion)

It has long been understood that it is politically difficult
to introduce a new and untried order of things which upsets the economic status
quo. With the slow motion economic failure of the 30 year experiment, it is
nevertheless important to ask: how can
we make a difference politically and begin to organise a better world. The
answer is not obvious. We have accumulated so many critiques of neo liberalism
that, if they were all piled up one on top of another, they would surely by now
reach to the moon. And yet, after several decades, we are no closer to
defeating neo liberalism.

This disconnect between critical thought and effective
action isn’t a problem for everybody. As we have argued in our blog about
Thomas Piketty’s Capital, the sales success of that book can be attributed to
the way in which it combines fact driven critique of growing wealth and income
inequalities with an utopian solution of higher income and wealth taxes. This
solution will never be enacted when we live in post democracy where the mass
party is no more and the organised working class have been disempowered

But it is a big problem for the team that wrote The End of
the Experiment because we wanted to write a book that moved from critique of
the thirty year experiment to new political proposals for action and
intervention. Of course we are academic
scribblers not political practitioners. But we can break with the dismal TINAF
(There is no Alternative Framework) assumption that frames current centre left
and centre right politics; and hope that
our arguments can have some performative impact in the next phase of
ongoing crisis

In our book, the distinctive form of our critique shapes our
concept of the alternative. Because the one centralised, Westminster led
dogmatic experiment has failed, we recommend much more diversity of regional
and local experiments which provide the basis for discovering answers. Because
our critique shows that the generic fix of competition and markets has led to
sectoral mismanagement, we recommend a different approach which recognises the
heterogeneity of the economy and engages with activity specifics in what we
call the foundational economy.

The argument on these points in The End of the
Experiment is dense but it can be
simplified and systematised. The book’s
policy argument starts from a contrarian insight about how there is more than
one economy. It then focuses on part of the economy by proposing the
foundational economy as an alternative
object before proposing chain value and social license as policy principles do
which could be developed and articulated through local experiments

1) The contrarian
insight

After thirty years, it is not difficult to see the problems
inherent in the current framing of our politico- economic problems in a country
like the UK. It is increasingly realised that our economic problems do not have
technical solutions with existing management tools. It is widely accepted that
the current UK recovery is consumption based, debt fuelled and unsustainably
driven by house price rises: if that observation is set in the context of boom
and bust over the past thirty years, the implication is that there is no
setting of the macro policy levers (fiscal and monetary) which will deliver
sustainable UK growth.

The main stream response is denial. The Thatcherite
revolution fails because it is incomplete, the answer is more of the same (and
please don’t talk about debt based growth). The generic fix of competition and
markets is now applied with more force to energy, banking and every other
sector; this structural reform is backed by bolt-ons like industrial policy to
deal with market failure in the commercialisation of early stage innovation.

This kind of obsessive compulsive behaviour may be
increasingly incredible; but it is at the same time difficult to reframe issues
and propose an alternative that works. The difficulty relates to habits of
thought and organisational peculiarities which are embedded in main stream
British politics.

In terms of overall vision, the centre left’s question has
always been why can’t we be more like Germany and their difficulty is that they
have no policies which would move the British economy away from financialization
and onto a more virtuous productive path. Manufacturing output shows no
sustained output growth because the aspirations of foreign owned branch firms
are limited as are the capabilities of British firms who prefer to compete in
sheltered sectors; adding more finance for production or up-skilling the
workforce will achieve little without radical changes elsewhere because UK
supply chains are constructed around low skill and investment.

As a way of breaking out of this impasse, we turn to the
insights of the French historian, Fernand Braudel. First, “there is more than
one economy” because the economy is heterogeneous and includes zones that are
not competitive. Furthermore, capitalism is as much about monopoly as
competition because local monopolies are what many firms want and the state can
franchise. These contrarian insights are the basis for our break with main
stream thinking.

In the 30 year experiment, the economy was represented as
the unitary sphere of competition where all should submit to the imperatives of
globalisation; this conceptualisation was reinforced by the aggregation of
everything into national income measures with growth and jobs then promoted as
the objectives of policy. Against this we argue that a large part of the
economy (more than one third) is sheltered from competition; while growth and
jobs are socially meaningless objectives when the income gains from growth are
captured by the top 10% of households by earnings and because low wage jobs
spread welfare dependence

2) Our object is the
foundational economy

After recognising the heterogeneity of economic activity,
the question is about how to think about the different zones and their
interaction. Our focus is on the zone or sphere which we call “the foundational
economy”. The foundational has never been an explicit object of policy and (we
would argue) has been mismanaged insofar as it has been subjected to the
competition and markets fix.

What’s inside the foundational economy? On our calculations,
we include the pipe, cable and wireless utilities that deliver water, energy
and broadband, transport utilities like rail and bus, food processing and
distribution through supermarkets and most of the lower levels of health,
education and welfare. Their outputs are mundane goods and services, from
processed food to primary education, which lack the glamour or attractiveness
found in high tech or knowledge based “key sectors” like aerospace or the
creative industries.

The activities inside the zone are diverse in terms of
outputs or ownership because the foundational economy produces a bewildering
variety of goods and services under private and public ownership. Yet these
activities also have a series of shared characteristics which are the basis for
our classification. These goods and
services are all foundational because they are necessary to everyday life,
consumed by every citizen regardless of income and distributed according to
population through branches and networks. They are also typically sheltered and
often politically franchised so that the state (through regulation and planning
laws) gives the cable tv operator or the big box retailer an effective local monopoly.

When these activities are bracketed together, the
foundational economy appears as a large and strategic zone for several reasons.
Large because the foundational economy employs one third or more of the UK
workforce; strategic because the cost, quality and security of foundational
goods and services (such as energy supply and health care) are key determinants
of citizen welfare. Indeed foundational activities are funded by a kind of lien
on tax revenue and household expenditure; foundational expenditure accounts for
30% on average of weekly consumption in households who have little choice about
paying utility bills or buying supermarket groceries.

After a period when low cost provision of many of these
goods was taken for granted, the price and security of foundational supply is
increasingly an issue. The crisis of foundational supply is related partly to
the limits of our small planet and partly to the failed thirty year experiment;
thus, our privatized utility operators like BT are investment averse and
British infrastructure is increasingly being half-heartedly renewed by billing
the customer or taxpayer for investment.

3) Our economic
principle is chain value

Our argument on the foundational economy starts from a
distinction between two concepts of value (point value and chain value) which
is then developed into an argument about how the foundational economy is being
mismanaged on point value principles and would be better managed on chain value
principles.

Point value means that the measure of success is least cost
or highest profit in an individual transaction (or basket of transactions) at a
node in an economic chain. Point value is an active and now ubiquitous
principle in the calculations of private and public sectors.

It is represented in the public company imperative of
shareholder value through quarterly earnings and higher stock price; or in
private equity through cashing out by selling a portfolio company to meet the
equity investors’ demand for high returns which are levered up with cheap debt.
But it is also represented in the public sector response to budget cuts and
value for money when, for example, in adult home care the local authority cuts
the hourly rate paid to the agency supplying care workers.

Point value has considerable intellectual prestige; because
it is in one form materialised in all the post 1930s business school
calculations of return which take account of the time value of money; as with
discounting to calculate net present value. At ordinary rates of interest, such
calculations are socially questionable because they devalue the future by
attaching a very low value to returns more than 5 or 7 years away. Practically also, they are place bound
because point value represents a trader mentality which ignores broader social
consequences.

Point value is embedded in private business models which
then pass problems down the chain as with supermarkets which use their power to
capture supplier margins. In the public sector, the problem is that the state
gains on one account only to lose on another account. Thus, wage cuts will
reduce the cost of providing council services but increase the demands for
housing benefit and other kinds of welfare support. Pervasive point value therefore spreads
unsustainability as private and public actors trumpet their point success when
supply chains are undermined and the welfare bill spirals out of control.

So our alternative is back to the future with the
alternative principle of chain value. We
should recover the idea of value as a stream of benefits for (internal and
external) stakeholders over time. Benefits are not only financial and
measurable through one master calculation because there are several orders of
worth and long term uncertainty requires defensive prudence. This requires a different
kind of economic calculus which balances the interests of different
stakeholders (rather than privileging the investor); and introduces political
objectives around the ideal of connected economies which deliver both the
benefits of re-localisation and of national standards and inclusive national
networks

One of the central problems is that much of this calculus
about interconnection is not actionable within the current British system and
is equally unlikely to be realised through
the forms of decentralisation which are currently on offer. The British
way after the 30 year experiment is to dispense with intermediary institutions
and combine self-governing operating units with centralised political power
which micro manages in an interfering way; hence the decision makers are the
PLC board or the Academy School governors subject to interference by Vince
Cable or Michael Gove. As for devolution and decentralisation, in the bi
partisan view, articulated in the Heseltine and Adonis reports, this is a matter
of handing decision making and central money to dominant regional elites with
very few questions asked.

4) Our political
principle is social license

The operationalization of chain value thus requires not so
much more government as a different concept of what nested levels of government
are and can do. As well as very much less reliance on governance at operating
unit level which always promises much more than it delivers.

We are against the post 1979 concept of business friendly
government which has dominated in the period of the thirty year experiment. In
this frame, government’s role is facilitative as it creates the space in which
the incentives of markets and competition do their work; hence the structural
reform agenda of lower taxes, market liberalisation, deregulation and
privatisation. The only acceptable forms of local and regional policy are
infrastructure and training which make the market work better (and now help
create competitive agglomerations); industrial policy is about rectifying
market failure in commercialising innovation.

Against this, we make another back to the future argument
which revives the 1930s ideas of US thinkers like Berle about how business and
community are in a relation of mutual dependence because all business exists
under a social contract whereby the corporation should offers responsible
behaviour in return for the privileges which allow market access and secure
profit taking. This is especially so in the foundational economy where the
privileged business gains a local monopoly on the household spend of an
immobile population in communities and user groups

Hence our arguments for social license in the foundational
economy with the aim of enforcing the obligations of business to the community
(which are much broader than those of customer care). The explicit analogy is
with the mining industry where a social license about benefits for the local
community is the quid pro quo for the right to exploit immobile natural
resources. Social licensing in the foundational economy would impose relevant
conditions on specific activities. Thus, councils would be obliged to pay
living wages while supermarkets should attend to local sourcing; this would
need to be backed by social innovation to change business models.

All this has fierce political pre- conditions in that change
through experiments with scope and scale requires decentralisation with
intermediate institutions under electoral and civil society pressure for
change. But, if we do not have the answer and favour diverse experiments, then
regional and local government can begin right away with experiments in areas,
like adult care, where resistance to change is weakest. The question is whether
regional and local governments, under pressure from civil society, can rise to
this challenge and through experiments and “ actual experience” demonstrate the
potential of this approach in ways which increase not just “public acceptance”
but public demands for change.

If the exhibits in Part II show
that the market experiment had many unpredictable and unanticipated outcomes,
how does that register in the UK’s core sectors? ‘The
End of the Experiment?’ develops three case examples of ‘foundational
economy’ activities that demonstrate what’s gone wrong over the past 30 years
and how we could do things differently for better economic and social outcomes.

Our starting point is that is
that all markets are embedded in politics and that we currently have a problem
with political planning. The cases of i) telecoms and broadband, ii) supermarkets
and dairy, and iii) retail banking are services most of us use every day. The
cases show the increasing prevalence of ‘point value’ calculations and trader
mentalities within large, quasi-monopolies, where cashing out often comes at
the expense of national outcomes and social objectives. All reveal different
fault-lines in their business models that work against societal interests as
well as the limits of a generic ‘competition and markets’ framework.

Let’s follow the money and
find the faultlines

‘The
End of the Experiment?’ cases show how, in different ways, we have ended up
with socially and economically dysfunctional outcomes. This is unsurprising
when much of the foundational economy is dominated by shareholder value driven
business models. There are some generic overlaps such as confusion marketing
but all in all three cases the key drivers are financial because giant PLCs
compete on two dimensions: (1) the product market to win customers; (2) the
capital market to generate the narratives
and numbers expected by stock market investors.

The former publicly owned BT in
its modern guise shows a marked reluctance to invest in a national network of
fast broadband. This unsurprising result is the legacy of privatisation where
BT demonstrates a preference for distributing dividends - £20 billion
distributed since 1984 – and buying back its shares. The outcome is that its
super-fast fibre optic broadband terminates at the cabinet adjacent to, rather
than on, the premises. The government’s aim of rolling out super-fast broadband
nationally meets BT’s corporate requirements, but does it necessarily meet
social needs, particularly when the company expect the state to subvent an
extension of the network to rural areas?

Supermarkets present themselves
as supporters of British farmers, but a point value mindset often harms stakeholders
as suppliers are squeezed upstream. In dairy farming the farmers are visible
and vocal complainants, but the invisible and silent victims are often the milk
processors in the middle of the chain. In the decade since 2001, processors’
share from a litre of milk has declined from 35% to 19% while supermarkets have
maintained margins through a form of predatory contractualism.

Retail banks’ rely on the pressure
selling of products to customers where the proceeds are applied to cover branch
costs. This is a necessity under a shareholder value driven model in the
context of free banking. This often results in numerous mis-selling scandals –
the fines for which are treated as a basic cost of doing business. The policy
response is nearly always to encourage new entrants, without any understanding
of either the destructive competition in the product market or the unreasonable
capital market demands for high returns on equity which underlie the dysfunctional
business model.

Is this the outcome of market
competition?

All three cases play out in
different ways but all have socially and economically dysfunctional outcomes.
All manage to deliver acceptable stock market returns (although some
supermarkets are under pressure). But all crucially depend on their supply
chain positioning at key pinch points which gives them power over suppliers or
customers. The pursuit of ‘point value’ strategies means that position is
exploited to extract value immediately at the expense of a stream of benefits
over time. Value is maximised at the point of transaction to benefit the
shareholder; profits are levered on suppliers and customers without regard to
the social/national interest.

The 30-year experiment has above
all enshrined generic competition as its mantra. And to varying degrees, with
governments of different hues, this is the principle that has underpinned
policy. So within this context, how, in such a large portion of the economy,
have these PLCs maintained return on equity and profit margins? Equally, how have PLCs limited the effects of
competition when firms are competing amongst themselves inside each sector?

The key features that have
prevented the erosion of margins and returns are (a) the companies avoid direct
price competition through confusion marketing which is actively used in all
three sectors (e.g. bundling to make comparisons difficult); (b) PLCs inside
sectors operate using similar business models –often narrated to emphasise
differences –that create an opera of stereotyped competition with emphasis on a
part e.g. service, plus (c) PLCs using ‘point value’ as a means of exploiting
local power relations to take margins off other stakeholders.

There are alternatives but
they require vision and framing

The normal treatment of corporate
excess and scandal is to claim that it is the result of ‘market failure’ which
requires ‘more competition’. These framing devices dominate the rhetoric of Select
Committees, policy reports and other outputs. The recommendations are always
generic: encourage new entrants, educate consumers, limit monopoly excess. In
doing so, the frame narrows our field of the visible and limits our imagination
about what alternatives are possible.

The success of this framing has
been overwhelming. But there are many other experiments beyond the free market that
perhaps meet social and economic need more successfully. These experiments
focus on co-operation and co-ordination to rebuild fragile or fragmented supply
chains that resulted from the 30 year experiment. They include modest
innovations by local authorities in the UK trying to re-glue the supply chain
fragments by co-ordinating private sector partners; building agglomerations of
expertise and overlapping functions in their area. These experiments also
emerge spontaneously in the private sector: for example, Morrison’s vertically
integrated meat supply chain secures supply and investment-driven efficiencies.
Similarly Tesco’s intervene in the milk supply chain by guaranteeing, via the
processors, a minimum price per litre that effectively puts a floor under
competition. Alternative forms of ownership may also change the characteristics
of competition: municipally owned utilities in the US compete successfully
against PLCs, despite operating with quite different priorities. These
different examples do not necessarily require central state planning or
co-ordination since they involve the rebuilding supply chains from the bottom
up.

These are all experiments related
to building the foundational economy.

Looking at the three cases in the
book it might be easy to conclude that these are just examples of ‘bad company
behaviour’. But that would be an alibi and deny the need for something more
than just the restatement of more competition and more markets with the usual bolt-ons
like industrial policy. But doing something different requires a fundamental
reframing of our problems that should include interventions through licensing
for social objectives. However, that will require political will not generic
fixes for the generic rhetoric of market failure.

Thursday, 3 July 2014

The free market experiment began with the Thatcher government of 1979 and continued under Major, Blair and Brown. Looking back, many of the changes that occurred in the UK were not well anticipated by the arguments made for markets at that time. Yet despite these undisclosed outcomes, our political classes have yet to consider a 'null hypothesis' result.

The 1980s experiment was premised on a set of visionary promises about what the market could deliver. The vision centred on a critique of the State as a blockage on jobs, growth and competitiveness and a distorter of price signals in a market setting. Drawing on the sentiment, if not the detail, of the Bacon and Eltis thesis, it was argued that the public, non-marketed sector ‘crowded out’ private sector investment and enterprise. Similarly the debate over the public utilities was transformed by an Austrian view that the market would bring the rigour of competition and efficiency of co-ordination to cumbersome public utilities industries. The solution was wholesale de-regulation and privatisation to release entrepreneurial spirit and build an enterprise culture that would benefit ‘the public’ in its multiple identities: as producers, consumers and taxpayers.

The reforms may have had effects, but they were often not the effects that were expected. Surprisingly, public sector job creation increased, both absolutely and relative to private sector job creation under Tory administrations (figure 1). 86.4% of net new jobs created from the beginning of the Thatcher administration to the end of the Major administration came from the public sector. Whilst some of that is explained by the economic cycle, it was mostly the result of a secular decline in manufacturing jobs (over 3m net jobs were lost) which the growth of financial services could not rebalance (only 250k net new jobs were created). By the end of New Labour in 2007 this figure had risen: 4.4m manufacturing jobs had been lost since 1979, with only 330k new financial services jobs created to compensate. What the Conservatives - and later New Labour - discovered was that public sector jobs were a necessary cost, ‘filling in’ for (not crowding out) anaemic private sector job creation and buying in public quiescence at a time of unrest.

Figure 1

Equally unanticipated was the lack of new entrepreneurial sole traders and SMEs, despite the promise that deregulation extended. From 1992 (when our time series began), the number of full time self-employed workers was virtually flat, until redundancy forced expansion after the 2007 crash. Instead, there was a growth in casualised, insecure low paid jobs: part-time self-employed jobs increased 116%, while part time workers for corporations increased 32% (figure 2). At the same time, large firms failed to show the entrepreneurial flair promised in the discourse of free markets, choosing often to sacrifice high risk/high return activities for modest returns, low risk activities plus scale. The free market experiment, in other words, created an environment where capital satisfices: large companies calcifying around the apparatus of the state, lobbying hard for the release of ever more low return but safe public activities.

Figure 2

This pattern of satisficing was also evident in investment, which always carries risk because it is a gamble on management's strategic and orgranisational competences. The free market experiment promised to stimulate investment, but these problems stubbornly remain. Investment as a % of GDP fell from 17.6% in 1980 to 14.4% in 2013; and the UK continues to have the lowest investment share of GDP among all G7 countries (figure 3).

Figure 3

If the hypothesis that markets would stimulate private sector job growth and investment proved faulty, it equally did not capture unexpected drivers of growth in a more marketised economy. Both Tory and Labour administrations assumed that growth would come from operating efficiencies, competitiveness and specialisation forged within dynamic markets. What they did not anticipate was the importance of credit and asset prices as key sources of growth in a liberalised economy. The push of newly minted credit against real estate assets allowed households to cash out equity gains as income. That income was spent, and GDP rose. It is a staggering fact that housing equity withdrawal was equal to 104.2% of GDP growth under the Thatcher administration and 101.7% of GDP growth under Blair (figure 4). And whilst equity withdrawals were not always spent on items accounted for under GDP measures, its contribution to growth should not be underestimated.

Figure 4

So what were the outcomes? It is clear that the opportunity culture did appear for some: house-flippers, upper income employees in the state subvented sectors, the (subsidised) financial services industry and certain professions all did well. But for many, the disposable income inequalities that emerged put a ceiling on opportunity as income mobility rates fell. By the end of the 1970s the tenth richest households (D10) had five times as much disposable income (before indirect taxes) as the tenth poorest households (D1). By the 2000s the average ratio was almost ten times. These effects were further amplified by the shift from direct to indirect taxes which hit the poor disproportionately: D10 to D1 inequality was 13.4 times on average over the 2000s, up from just over 5 times at the end of the 1970s by this measure (figure 5).

Rising inequalities between households should be understood within a broader context of disenfranchisement as household's lost their stake in GDP growth. At the beginning of the 1980s average disposable household incomes were – effectively – a lien on growth. That changed by the mid-1980s, so that by 2011 (when our series ends) the disposable household income growth of the bottom 90% of households had not kept up with GDP (figure 6). And even the top 10% of households had only just kept pace with GDP growth. Where did this share go? Labour’s pre-tax share of GDP fell 3.5 percentage points from 1979 to 2010 - this was almost identical to the growth of financial corporation gross operating surpluses share of GDP, which increased 2.9 percentage points; although taxes on products and production also claimed a similar increased share of GDP.

Figure 5

Figure 6

These unexpected outcomes may truly surprise us. But surprises are commonplace in all experiments. Learning from those unanticipated results – in this case – seems something that our political classes are less willing to contemplate.

Monday, 30 June 2014

Our new book, The End Of The Experiment? From Competition To The Foundational Economy is now available as an ebook on Kindle. Over the coming weeks we will be outlining its argument and we begin here with a sketch of the historical and intellectual context of the work.

The British economy has been in relative decline since the last quarter of the 19th century, and there has been debate about the sources of that decline since at least the great ‘national efficiency’ debate prompted by the failings revealed by the Boer War. Britain, it seems, is the subject of eternal experiments. In the post-war years there have been two. The first was the post-war settlement, which delivered historically unparalleled prosperity and generous public goods in the form of the welfare state. That settlement floated on the ‘long boom’ (the thirty glorious years) and it sank alongside that long boom in the 1970s. For over thirty years now we have lived through a new experiment, symbolically inaugurated by the victory of Thatcherite Conservatism in 1979, but an era of experimentation which also encompassed the heady years of New Labour domination. That experiment had several well known features. It created ‘flexible’ labour markets; it dismantled the command economy represented by publicly owned industries; it placed a bet on the creation of a ‘branch’ economy in manufacturing in a global division of labour, and on a financial services revolution in London; it prompted an outsourcing revolution which saw numerous public services franchised to private corporations; it created an audit state; and it ushered in a new era of micromanagement by the Whitehall elite.

The starting point of our book is the failure of this latter experiment. The public occasion of failure was the great financial crisis, but the roots lie much deeper. Our book explores four great deficits left by the thirty year experiment:

A competitiveness deficit: productivity stubbornly lags behind our competitors; the financial services sector has failed to generate employment; and ‘branch’ manufacturing has failed to solve the problem of the trade deficit.

A sustainability deficit: the post-war settlement delivered generous public goods; we show (for instance in our broadband chapter and in the separate studies of the rail industry carried out in CRESC) that the privatised system isn’t delivering a sustainable infrastructure.

An accountability deficit: the thirty year experiment was legitimised in the language of accountability, but it has created new worlds of unaccountability – out of control corporate elites, franchises in privatisation and outsourcing shrouded in opaque accounting, constant uncertainty about accountability lines between politicians and service deliverers.

A competence deficit: the age of experiment has also been a new age of fiasco - outsourcing, PPI, rail privatisation, financial regulation; a hollowed out civil service unable to police the new franchises.

The metaphor of an experiment has an appealing ring: experimentation is, after all, the standard method by which the sciences learn, by testing, refuting or confirming theories. But the British history of experimentation is very different: we show in the book that we live in a state that finds learning from experience very hard. There seem to be three political reasons for this:

‘Hyperpoliticisation’: in a world of extreme micro-management everything is turned into adversarial politics and what in the book we call the ‘antidote fallacy’

The closing of the metropolitan political mind: a drastic narrowing in the social and institutional range of elite recruitment (symbolised by the disappearance of the mass political party and domination of politics by a narrow class of professionals) is part of the problem; an equal problem is the rise, since Thatcherism, of a ‘TINAF’ mentality: There Is No Alternative Framework, and this drastically narrows the range of possible dissent from the official ‘line to take’.

The shrivelling of professional expertise. Thirty years of centralisation and increasingly tight control of professional elites have left (beyond devolved government) shrivelled alternative institutions in civil society - and alternative sources of ideas.

Monday, 23 June 2014

“Just the Facts, Ma’m” is the catch phrase credited to Sergeant Joe Friday of the LA Police Department in Dragnet, the US television series of the 1950s. Friday wanted the facts because they would lead to a cycle of purposive effective action with arrest leading to conviction and detention of criminals who should be afraid when Sergeant Friday is onto their case. Professor Thomas Piketty of the Paris School of Economics also offers us the facts, in this case on the history of income and wealth inequalities. But these facts fit into a different kind of cycle of guaranteed inaction whereby society can recognise the problem of growing inequality without any prospect of effective redress so that the rich can sleep soundly in their beds

This is our explanation for the bestselling success of Capital in the 21st Century (here after Capital), the English translation published of Le Capital au XXI siècle, published last year by Editions de Seuil (Piketty 2014). This is a prolix and inelegant 700 page doorstop of a book, published by an American university press and written by a little known author. It garnishes the facts on the historical development of income and wealth inequalities in twentieth century France, Germany, Sweden, Japan, the UK and the US with some musings on fictional inequality in the world of Balzac and Austen.

This book which failed to gain attention when published in French, has suddenly become a global must read. It has been on the top 100 non-fiction bestseller list of Amazon for thirteen uninterrupted weeks and on the New York Times bestseller list for nine weeks, topping the list for three of those nine weeks. Capital has been lauded by at least two Nobel-laureates (Krugman and Stiglitz) as the most important book in economics since the Wealth of Nations (1776) (Krugman 2014), has been reviewed by every serious economist and has been deconstructed and reassembled in hundreds of economic blogs.

While other economics professors grade essays, Professor Piketty has toured two continents as if he was a true rockstar, has been received for a private tête-a-tête at the White House by Obama himself, has talked to the great and good from the worlds of global finance and politics, has been invited to talk to the Dutch parliament and has earned enough in the form of royalties, according to his own assessment, to buy a piece of prime real estate in the 16th arrondissement of Paris – which easily amounts to four, five million euros.

The central exhibits in his text are U shaped curves of the shares of wealth and income claimed by upper groups. While the U shaped curve of wealth distribution is new (and now challenged in the FT), his curve which shows income inequality returning to pre-1914 levels is not new because (in one form or another) it has featured in a series of academic publications by Piketty and his associates since the mid 2000s. The central finding is also no surprise. Income and wealth inequalities since the 1970s in most developed economies have increased to levels typical of the ‘patrimonial capitalism’ of the late 19th century. But Piketty himself has been arguing this since 2003 (see Piketty 2003), alone or together with his compatriot Emmanuel Saez (see Piketty & Saez 2003). The doyen of comparative inequality studies, Tony Atkinson, has been ringing the warning bell for at least two decades (see Atkinson 1996). The web site with their data, the World Top Incomes database, has been public for at least three years.

This raises the question why Capital has become such a big success, and especially: why now? Our answer is that Piketty’s fact-led discourse suits mainstream thinkers in the present conjuncture. Before 2008 distributional problems were covered up by growth figures artificially beefed up by debt-driven asset inflation, especially in real estate; after the outbreak of the crisis in September 2008 nobody can deny that financialized capitalism rewards the few and simply does not deliver for the many. Financialized capitalism is a benefit for multinationals and elites but a disaster for citizens and the masses. And this verdict is no longer radical critique from the Occupy movement, Los Indignados or a few elderly socialists, it is endorsed by economists like Paul Krugman, Joe Stiglitz and Larry Summers.

In the background, the high priests of neoliberal liturgy like the IMF, the World Economic Forum and the OECD have recently voiced grave concerns over the political effects of rising income and wealth inequalities in developed economies (see IMF 2014). Under the banner of inequality threatening the legitimacy of capitalism, the IMF has even bracketed its traditional aversion to cross border capital controls (IMF 2012). An even starker illustration of the concerns raised by increasing inequality among the global financial elite is the May 27 London conference on ‘Inclusive Capitalism’. Organised by an heir to the Rothschild fortune, the conference allowed the great and the good such as Martin Wolf, Christine Lagarde, Prince Charles and Mark Carney to lament increasing inequality (see Lagarde 2014).

Against the back ground of disaffection with main stream politics, it is hardly surprising that the great and good are now recognising that they have a problem about the legitimacy and attractiveness of financialized capitalism. While bankers’ bonuses in the City and on Wall Street are back at the level of 2008, ordinary households in the US and the EU are still facing declining disposable incomes, resulting in pretty severe cost of living crises on both sides of the Atlantic. The stock markets are at record highs with price records being set again on art markets and in markets for prime real estate in New York, Paris and London. The unconventional monetary policies which central banks hoped would beat the ‘great recession’ have instead benefited the wealthy by boosting asset prices.

Led by Amazon and Starbucks, and advised by para-financial accountants and lawyers, large firms have succeeded in paying an ever smaller share of overall taxation, and hoard ever larger amounts of cash which is not invested. Households by default have to bear the brunt of both the austerity policies enacted throughout the EU and through higher prices or taxes pay for investments in the renewal of material and immaterial infrastructure (roads, rule of law, education) on which large corporates depend. Corporate lobbyists with trade narratives shield politicians and confuse citizens who nevertheless by majority in countries like the UK typically support policies like renationalisation of utilities.

Enter Thomas Piketty: a French economist with a reassuring CV that includes a PhD from the LSE and a stint as economics Prof at MIT. On the basis of carefully assembled historical data and an impressively sounding law of capitalism ( R > G ), Piketty warns that ceteris paribus we are returning to the patrimonial capitalism of the late 19th century. Capitalism is an inequality machine because the return on capital (R) in a context of demographic decline will always be three to four times larger than overall economic growth (G), implying that income and wealth inequalities due to the forces of compounded interest and multiplication will by necessity grow. Mid twentieth century equality is according to Piketty an anomaly based on unrepeatable historical contingencies including war, destruction, financial repression, inflation, the rise of mass democracy and redistributive welfare states.

The strength of Capital lies in its careful presentation of the historical facts. As Piketty writes in the Acknowledgement: ‘this book is based on fifteen years of research devoted essentially to understanding the historical dynamics of wealth and income’ (p. vii). No more, no less. Thence the 18 Tables and 97 Figures, that have to prove beyond reasonable doubt that the phase before 1914 was capitalist normality, that the period between 1914 and 1970 was capitalist exception, and that in the past thirty years we have embarked on a trajectory which will bring us irrecoverably back to that earlier normality.

The book derives its unmistakable political seductiveness from it’s a-theoretical, empiricist factuality. Although Karl Marx figures prominently in Capital, the spirit in which it is written is one of classical (not radical) political economy. Piketty’s devices include accounting identities, economic laws (‘the first fundamental law of capitalism’) and echoes of classical demographic arguments; Capital resembles Thomas Malthus much more than radical theorists like Karl Marx who employed the labour theory of value of Adam Smith and his ilk to critique the exploitative nature of industrialized capitalism and predict its ultimate demise through crises of over accumulation.

The reader looks in vain in Capital for Marxist or Marxisant theoretical explanations around class and accumulation or bourgeois radical explanations around business models, agents, power relations and politics. Piketty asserts R > G as an explanation for growing inequalities, but it is of course no such thing. One section poses the crucial question as to why the return on capital should be greater than the growth rate (p. 353 ff); but this section does not contain any answer other than a summary of the historical record. Growing inequalities are inherent to capitalism au naturel, that’s just the facts.

And facts have a value which is enlightenment. ‘Intellectual and political debate about the distribution of wealth has long been based on an abundance of prejudice and a paucity of fact,’ writes Piketty in the Introduction where he explicitly refers to Kuznets and his Whig expectation that economic progress would bring less not more inequality. Thus the main aim and the huge success of Capital (p. 2). This is the book which brings light where darkness reigned – not to debunk or demythologize or accuse, but to put the political debate on inequality on a more secure, empirical footing and (implicitly) when we know the facts, will we be able to assess, judge and act. Piketty hence subscribes to the positivistic view of science which colours to this day the self image of economics: positive economics is about facts not values, the technical facts not the political choices.

Piketty is the samurai hero of positive economics who lays about him with fearless sword play. Progressive readers can only cheer his skewering of the marginal productivity explanation for the rise of supermanagerial rewards since the late 1970s (p. 330 ff.). As Piketty contends, increased bargaining power does a much better job in explaining rising income inequalities than any other explanation. Yet this line of argument is not connected with the political economy and political science by scholars like Wolfgang Streeck (2014), Colin Crouch (2004) and Peter Mair (2013),on the increasing malfunctioning of democratic policy making in the late 20th century. The political backdrop for the return of patrimonial capitalism is never explored.

From this point of view, our core problem is disconnect between the median voter and his representative. This is explicit in the Eurozone troika countries, indirectly in the excessive deficit countries of the Eurozone, implicitly in all the other representative democracies. Everywhere it has created a democratic vacuum in which large banks and multinationals have been able to push through a silent coup. Just as the rise of mass suffrage marks the beginning of the great anomaly period of increased equality in the 20th century, so the end of mass democracy and the rise of post-democracy marks the back to the future return of income and wealth inequalities. But all this is never explicitly discussed in Piketty who simply avoids any kind of political explanation for the phenomena he describes.

In our opinion, this political reticence explains Capitals phenomenal success. In a conjuncture when capitalism is malfunctioning politically and economically, Piketty lets the undeniable facts speak for themselves. Thus, Piketty has succeeded in making his message about increased inequality palatable to an audience of important people who would have bridled at anything that smacked of contrarian leftism which in Marxist and Social Democratic forms has always sought to organise politically on the basis of its economic analysis. Piketty does not offer an activist ideology; he deals in facts. No wonder that Larry Summers and Paul Krugman have claimed to see in Capital the birth of a new style of empirical economics. Away with models! Away with ideology! Away with theory! Here come the facts!

That is why Chris Giles launched his attack on Piketty in the Financial Times of late May and why it appeared so threatening to Pikettyites (Giles 2014). What if all those carefully assembled, speaking-for-themselves facts were wrong? What if the facts had overstated real inequalities? Would that not suggest that ideology lurked behind Piketty’s a-theoretical, a-political empiricism? If the facts did not speak for themselves and instead required political interpretation maybe there was nothing self-evident about Piketty’s facts? Inevitably, Piketty responded to Giles attack by claiming empiricist virtue: his work was transparent because ‘all Excel-sheets are available on Internet’; it was necessarily incomplete because ‘more data and more collaboration are needed’; and the adjustments were not biased because ‘colleagues have looked at off shore centres, suggesting that real inequality is larger rather then less’ (Piketty 2014a).

So far Piketty has done enough to see off Giles and other positivist economic critics who have until now only disputed the facts about the problem of wealth inequality and cannot find gross errors of the kind which the Amherst team found in Reinhart and Rogoff’s This Time is Different (see Herndon et al. 2013). But, given his style, Piketty cannot do enough to see off political critics who would instead focus on his recommended solutions as the point of weakness.

When it comes to fixes for inequality, in Chapter 15 Piketty presents his widely discussed ‘useful utopia’ of a global progressive wealth tax and is the first to acknowledge that politicians are unlikely to implement a wealth tax due to insurmountable collective action problems. Piketty can then present himself as the high intellectual in a low political world: ‘for reasons of natural optimism as well as professional predilection, I am inclined to grant more influence to ideas and intellectual debate’ (p. 513). Or, as we would put it, the more a-political, a-theoretical and empiricist the analysis, the less likely it is to have credible fixes as corollary.

The fixation on a global wealth tax is however revealing. If the problem of capitalism is R > G, merely analytically there are at least two different economic pathways and one more political pathway out of the predicament of increasing inequality. One could choose to structurally limit the return on capital, by means of an estate tax for example. That is Piketty’s preferred solution: < R. Alternatively, one could also choose to ensure that growth increases, either through investment, re-framing management and redefining economic activity. An alternative economic solution is > G through massive investments in infrastructure, managing the sheltered foundational economy through social licensing and innovation and redefining what goes into GDP

Finally, one could choose to change the distribution of rewards between capital and labour ( R : G ). This is a political solution because the means to do so are labour union renaissance and new modes of corporate governance with a stronger say for labour and other stakeholders. The aim would be to encourage demands for higher wages by recreating the bargaining power which organised labour had in the mid twentieth century and deny capital the gains it has made since the late 1970s when liberalisation loosened up the exit options of capital. As Thomas Frank has argued, if we strengthen labour against capital, the market will deliver the outcome which Piketty seeks through progressive taxation (Frank 2014).

Piketty’s preference for the pseudo technocratic fix of progressive taxation is revealing of his rationalist concept of management which again helps to explain his brilliant success. Progressive taxation is the rationalist solution because the logic of the ratios and aggregates is countered by an adjustment to the one element of government taxation which finance ministries can vary (but never will with the present balance of economic forces in high income countries). But this helps smooth the reception of his book amongst elites and opinion formers who market the book to a much wider circle. Piketty has a seminar room solution for inequality which is economically thinkable but not politically possible and the importance of his book is that it allows us all to acknowledge the problem of inequality without danger that we might be endorsing or licensing any effective solution. Read Capital and demonstrate your concern while doing nothing.

Monday, 28 April 2014

Nobody can predict with accuracy what will happen in the Scottish independence referendum in September, though the unremittingly negative cast of the ‘no’ campaign is probably helping narrow the gap between the two sides. That negative cast is certainly in part due to the obtuseness which is to be expected of a metropolitan elite trapped inside its own bubble: how else to explain the catastrophe of the CBI’s decision to alienate large sections of Scottish business, or Ed Balls’ decision to line up with George Osborne, a hated figure in Scotland, to try to put the frighteners on the Scots about currency union?

But the negative campaign is not mainly due to obtuseness. It is due to influences which suggest that, whatever the outcome in September, the ‘United Kingdom’ as a historical project has had its day. The ‘no’ campaign is overwhelmingly negative because the historical conditions that gave rise to a positive case for the United Kingdom no longer exist. It is necessary to put the frighteners on the Scots because there is no longer a convincing case for the United Kingdom which can attract the Scottish imagination. The idea of states and nations as ‘imaginary communities’ of course owes much to Benedict Anderson’s classic. And it certainly conveys the notion that a political construct like the United Kingdom had a fictional quality: in Renan’s famous words, ‘getting its history wrong is part of being a nation.’ But it is not the fiction that is important; it is the success of the appeal to imagination. A century of so ago any case for Scottish independence could have been met with a positive case that appealed to the imagination – especially to a Scottish imagination which was bound into the project that was the United Kingdom. That project fused economic and militaristic imperialism (to both of which the Scots made a quite disproportionate contribution.) It invoked Protestant providentalism, a providentialism which also drew special strength from the messianic character of Scottish (missionary) Presbyterianism. And it promised unity under a crown which had invented a part Scottish identity via Victorian Balmorality. Just imagine an attempt to mount a campaign now against the nationalists based on the empire, Protestant providentialism and unity under a crown: to pose it is to see immediately why it is necessary to try to frighten the Scots with horror stories.

This means that even if the ‘no’ campaign succeeds in the September referendum the conundrum of what the United Kingdom is about will still not be solved. Solutions – and a positive campaign – are indeed conceivable, but they are not feasible for the metropolitan governing elite. Just across the Irish Sea the problem of what to do about an exhausted national project was solved in the 1970s. By that date it was plain that the Irish nationalism ‘imagined’ out of 1916 was exhausted: Ireland was never going to be a rural, traditional, Irish speaking, Catholic outpost sealed off from the modern world. That was De Valera’s fiction, but a fiction which no longer commanded imaginative power. The Irish nation was instead successfully reimagined as a modern community enthusiastically committed to the project of European unification: people gave up on speaking Irish, practising Catholicism and listening to the Kilfenora ceilidh band. In principle it is possible to conceive a campaign against Scottish independence which reimagines the United Kingdom as precisely this sort of committed participant in the European idea. And for reasons that are obvious it is exactly the kind of campaign which hardly any Conservative can now imagine; and nor is it something which Labour, still grudging in its attitude to Europe and an intellectual prisoner of Unionism, is able to conceive.
On Friday 19 September, whatever the result delivered on the previous day, the problem of what the United Kingdom positively stands for will still therefore be unresolved.

Wednesday, 2 April 2014

The publication in mid-March of a report by the Public Accounts Committee on the latest episode in the outsourcing saga (Contracting Out Public Services to the Private Sector, HC 777, 2013-4) represents the latest attempt by the institutions of parliamentary scrutiny in the UK to come to terms with the astonishing phenomenon of the new contractual state and the accountability issues which it has created.
The dimensions of this new contractual state are now well established. The combination over the last thirty years or so of the privatisation boom and the outsourcing boom have created whole new areas of corporate enterprise and brought into existence new corporate giants. The PAC report itself documents some dimensions of the phenomenon. Government in the UK spends £187 billion on goods and services provided by third parties each year; about half of that is estimated to be directly connected to outsourcing contracts. The four outsourcing giants Atos, Capita, G4S and Serco between them held government contracts worth around £4 billion in 2012-13. Any financial configuration of this size and rate of growth raises obvious important issues of accountability. The Public Accounts Committee, under successive chairs, notably David Davies, Edward Leigh and Margaret Hodge, the present chair, occupies an honoured position in this struggle: a string of PAC Reports over the years have thrown light on successive and costly fiascos in the outsourcing system and in public procurement more generally. Democratic politics would be poorer without these interventions.

But the history of the Committee, and indeed its latest report, show key weaknesses of the accountability system. In a sentence: this is a 19th century institution, with a 19th century set of values, trying to make sense of a 21st century world. The PAC is an unusual Committee. Most of the present range of House of Select Committees are creations out of the post-1979 reforms set in motion by Norman St John Stevas as Leader of the Commons. The Public Accounts Committee, by contrast, traces its origins back to the middle of the 19th century. It is a creation of the great budgetary reforms associated with Gladstone’s tenure as Chancellor of the Exchequer, and it reflects his famous insistence on the importance of economy in public spending – on the importance of ‘saving candle ends.’ The key House of Commons resolution, of 1862, which still governs the Committee’s mission reads in part as follows:

‘There shall be a standing committee designated "The Committee of Public Accounts"; for the examination of the Accounts showing the appropriation of sums granted by Parliament to meet the Public Expenditure, to consist of nine members, who shall be nominated at the commencement of every Session, and of whom five shall be a quorum.’

In 1866 Parliament created a key institutional connection which continues to shape the Committee’s work: it appointed the PAC as the overseer of the work of the Comptroller an Auditor General, who in modern Britain has morphed into the head of the National Audit Office. As a glance at the hearings that underly the most recent report show, it is investigations by the NAO which now provide the main grist for PAC hearings and subsequent reports.

These 19th century origins have had two fatally narrowing consequences as the PAC has struggled to come to terms with the new contractual state. The first is that the original ‘saving candle-ends’ emphasis on austere economy has turned, in the age of neo-liberalism, into a single minded focus on the extent to which outsourcing is governed by competitive markets, and the extent to which competition delivers ‘value for money’ – delivering the most economic candle ends that money can buy. This latest report, like earlier PAC investigations, is essentially about why the competitive market doesn't seem to be working in outsourcing. The second fatal narrowing consequence is that the work of the Committee has become focused on fiascos in the outsourcing system. A subsidiary reason for this is that the investigation of fiascos, and the chastisement of senior executives in public hearings, makes for good media soundbites. All modern chairs of the Committee have become minor media stars delivering excoriating judgements on firms’ failings on TV news and on the Today programme. And indeed the exposure of fiascos, of which there are plenty in the contracting system, is a legitimate task of the PAC. But the overconcentration on media focused exposes, in the manner of a kind of parliamentary version of Private Eye, risks missing the bigger accountability issues raised by the rise of the huge outsourcing system. Documenting that G4S keeps losing prisoners, or that it made a pig’s ear of the contract to provide security at the London Olympics, certainly provides good copy. But a focus on fiasco draws attention away from more important issues. Most of the contracting that takes place in the outsourcing business does not involve fiascos, for the very good reason that it is largely about making money from carrying out safe, easy to organise, mundane services: just how difficult can it be to administer the pension payment system for teachers? Outsourcing means handing over to a small number of corporate giants a set of licences to print money. And the relationships which govern the award of those licences, and more importantly the contractual conditions under which they are awarded and scrutinised, are largely missed in the search for candle end savings and the exposure of fiascos.

About Me

Manchester Capitalism is a collective of provincial academics who publish together on financial reform, economic renewal and political mobilisation. Our output of books includes After the Great Complacence (OUP 2011) plus working papers and public interest reports, like 'Bringing Home the Bacon' or 'A Leveson for the Banks' available at CRESC.
This blog is written by individuals who are part of the the CRESC team and so reflect the different conversations, internal debates and (occasionally) the disagreements that go on inside any collective. Collectives are rare in academia and we are often asked how ideas emerge and compromises are reached in our work. This blog represents a window on that process. For that reason we write here with pseudonyms: to demonstrate the multi-voiced inputs to our output and to preserve the integrity of the collective.